When should I move from Sole Proprietorship to LLC?
As of right now, expenses are close to zero, and income is equal to zero. Risk of law suits is also very low.
At what point should I move over to LLC? When the expenses, income or risk of litigation reaches a certain threshold?
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It would help if you'd say where you are... Laws are different in every country – Littleadv 12 years ago
2 Answers
Ask your accountant. If you don't have an accountant get an accountant :-)
Expenses and litigation aren't the only issues. In the UK for example there are tax breaks for investors that only apply to LLCs. There are often ways you can split your income between wages and dividends that make you more tax efficient as an LLC.
There are also advantages when dealing with some clients who for legal and social reasons prefer to deal only with LLCs or LLPs.
Accountants are really good at figuring this stuff out. I know if you're small spending tens or low-hundreds on somebody else's advice seems a lot - but in my experience it will likely pay off immediately, or at worst in the very short term.
Accountants are good at saving their clients money - it's their job :-)
Talk to some of your local businesses. Get some recommendations. Find an accountant. Ask them.
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You really think I should be paying an accountant to figure this out when everything is close to zero? That would make nearly 100% of my expenses go to the accountant, and would make my expenses outweigh my income, with nearly 100% of my losses going to paying the accountant. – Brentonstrine 12 years ago
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I think that the first meeting with an accountant is usually free - and after that meeting they'll either tell you to carry on since it's not worth your while to have an accountant, or you'll have an explanation of why the accountant will save you money. – Adrian Howard 12 years ago
When your business makes enough money that you can pay professionals (accountants, lawyers) to take care of all the LLC maintenance business (taxes, making sure you follow applicable laws etc.)
In software business the probability of being sued is minuscule and the protection that LLC offers usually overstated (see e.g. http://www.nolo.com/legal-encyclopedia/llc-basics-30163.html for basics of what LLC does/doesn't protect you from).
I currently operate as Sole Proprietorship and personally would not change to LLC even if I could afford it because it's much more hassle (paperwork-wise) and since I'm in small-time software business where I never have to take on debt to keep writing more software, the LLC protection from not paying my debts is useless.
